The 4 questions Baidu can’t seem to answer
Baidu‘s (NASDAQ: BIDU) the share price recently fell after the Chinese tech giant reported mixed results in the second quarter; its revenues fell 1% per year and fell short of expectations, and it revealed that the United States Securities and Exchange Commission had launched an investigation into its video streaming subsidiary iQiyi (NASDAQ: IQ).
During the conference call, CEO Robin Li attributed slowing income to “temporary setbacks” in its online marketing business – including a new wave of COVID-19 infections, “geopolitical tensions” and “another phenomenon plaguing the economy.” Li’s other comments were equally vague and likely left investors with more questions than answers.
Here are four burning questions that Baidu management did not answer, and why investors should be worried they were not answered.
1. Is Baidu still a leading advertising platform?
Online marketing revenues, which accounted for 67% of Baidu’s best line, fell 8% year-on-year in the second quarter, its fifth consecutive decline.
Baidu still controls 70% of China’s online search market, but internet users are spending more time on competing platforms like Tencent‘s (OTC: TCEHY) WeChat, bilibili‘s (NASDAQ: BILI) digital media platform, and ByteDanceGen Z oriented apps. Tencent and ByteDance already offer in-app searches, and Tencent is try to buy Sogou (NYSE: SOGO), operator of the second largest search engine in China, to strengthen its external searches.
Those higher growth the platforms draw advertisers away from Baidu. Tencent and Bilibiil’s online advertising revenue grew 13% and 90% year-on-year, respectively, in their recent quarters. ByteDance’s revenue is said to have increased by 130% in the first quarter of 2020.
Baidu management did not seem overly concerned about these competitors. Asked about Tencent’s potential merger with Sogou, Executive Vice President Dou Shen said Baidu’s “brand awareness” was “difficult to replicate” and that it “would continue to do well” in the research. Baidu also highlighted the growth of its mobile app for businesses, Managed Pages, and its BJH content creation platform, but these improvements have not significantly increased its ad revenue.
Baidu needs to beat its competitors, but management’s dismissive attitude towards them and its eagerness to blame its problems on macroeconomic headwinds are raising red flags.
2. Does iQiyi become a handicap?
Over the past year, Baidu has relied heavily on the growth of iQiyi to offset the slowdown in its core advertising business. But iQiyi is not profitable, so its revenue growth is actually weighing on Baidu’s margins.
To offset this pressure, Baidu reduced the traffic acquisition costs (TAC) on its main search engine. Lowering the APR makes sense if Baidu is comfortably ahead in the advertising market, but spending less money at a time when it is losing ground to its competitors could weaken its position further.
Yet Baidu continues to depend on iQiyi, which grew its revenue by 4% per year in the quarter and accounted for 27% of the company’s revenue. Earlier this year, a prolific short seller accused iQiyi of boost your income up to 44%. During the conference call, management admitted that the SEC was investigating iQiyi’s accounting practices.
CFO Herman Yu said Baidu has “zero tolerance for fraud” and has launched an internal audit on iQiyi and hired outside advisers. He did not directly comment on developments, but warned that audits and investigation could take “longer than normal” due to COVID-19. Editor’s Note: This paragraph has been corrected to indicate that it was Yu who said this.
These comments were balanced and diplomatic, but they did not answer two key questions: Is iQiyi becoming a handicap for Baidu? And should Baidu consider divesting its remaining stake in the company?
3. Is Baidu’s cloud business profitable?
Baidu does not regularly disclose its cloud revenue, but it claimed that the cloud unit generated 2 billion yuan ($ 290 million) in revenue in the second quarter, compared to 1.1 billion yuan ($ 159 million) in the second quarter. fourth quarter 2018.
This growth rate is impressive, but there is still a small player in the public cloud market behind Ali Baba (NYSE: BABA) and Tencent. Alibaba Cloud, the largest player in the market, generated 12.2 billion yuan ($ 1.73 billion) in revenue in the last quarter – and it is still not profitable.
If Alibaba operates its cloud business at a loss, it seems highly unlikely that Baidu’s outsider cloud platform will make a profit. Instead, this is likely another dead weight on his bottom line.
4. Will Baidu withdraw its shares from the Nasdaq?
Finally, Baidu has not given investors any insight into what it sees as its future on the US stock exchanges. Earlier this year, the US Senate passed a bill that could force Chinese companies to delist their U.S. stocks if they didn’t open their books and comply with the new regulations. US Treasury Secretary Steven Mnuchin recently warned that such write-offs could take place at the end of 2021.
Last May, Robin Li worryingly declared that there was “a lot of choice” for stock quotes beyond the US stock markets. In the same month, Alibaba CFO Maggie Wu reassured investors that the company had no plans to delist its U.S. stocks even as it launched an IPO. secondary in Hong Kong.
The bottom line
Baidu has significantly underperformed Alibaba and Tencent over the past three years, and this trend may continue for the foreseeable future. It is losing ground in the Chinese advertising market, and its new ventures are not profitable or generating significant revenues. These issues could persist, which means Baidu must start answering tough questions about its future.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.